Legal 101

Back in 1977, when John Travolta discoed his way through
Saturday Night Fever, a homebased business was about as
common as a unicorn. Having a home office was code for admitting
you were between jobs, desperately stuffing resumes into envelopes
and combing the classifieds.

What a difference a millennium makes.

Now 24 million people work from home, according to the American
Association of Home-Based Businesses. Unfortunately, many of those
millions started out intoxicated by their flight from Dilbertland
but ignorant of the legal and regulatory details needed to stay in
business, from business licensing and zoning to buying insurance
and finding a good attorney.

Facing this mountain of issues is enough to make you fantasize
about returning to the cubicle farm. But remember: Launching a
homebased business doesn't have to be nightmarish. There's
a boatload of resources out there, from Web sites and books to
other entrepreneurs willing to share what they've learned. To
help you get started, we've compiled a brief introductory
course on the red tape you'll have to weave through to create a
legal and safe homebased business.

Joan E. Lisante, Entrepreneur.com's Legal Expert,
is an attorney and freelance writer who lives in the Washington,
DC, area. She writes consumer-related legal features for The
Washington Post, the Plain Dealer (Cleveland), the
Spokane Spokesman-Review and the Toledo Blade (Ohio). She
is also a contributing editor to LawStreet.com and
ConsumerAffairs.com.

Business Licensing

There are two types of business licenses. The first is a permit,
allowing you to run a certain business at home. The second is a
"skills" license issued by the state for such fields as
accounting, architecture or photography. For the latter, check with
your state's secretary of state office to find out if your
profession requires a skills license.

As for business permits, your city's business license office
probably licenses everyone from independent paralegals to muffin
bakers. Occupations are grouped with similar ones in categories,
and each category has a set of hoops to jump through.

A home occupation permit can cost anywhere from $50 to $250 and
is usually valid for one to two years. Chances are you'll have
to declare your gross sales for the period, which your locality may
use as a tax basis.

Businesses involving cooking or baking, day care, high noise
levels or environmental pollution are usually regulated more
strictly. If you want to be the next Mrs. Fields, you may have to
convert your kitchen to "commercial" quality or rent a
commercial kitchen. Other local departments may also have a say in
your business, including social services, health, fire and
sanitation. Your city or county business license or business tax
division can help you sort out the regulations you need to be aware
of.

If you decide to call your business "Roadrunner
Resumes," for example, rather than just using your name, you
may also have to file a "fictitious business name
certificate" with the county or city clerk. This gets
published in a newspaper as a public notice.

AdditionalResources

Bankrate.com: The
State and Local Resource Guide lists laws, regulations and tax
demands on new business owners by state.

Zoning

Although the "z word" makes people's eyes roll
back in their sockets, the basic idea is simple: What type of
business is allowed where? Zoning regions are labeled industrial,
residential, commercial or farming/agriculture.

The more your business alters the character of a residential
area, the greater the possibility for problems. Will you need extra
parking or signs? Will employees or customers come and go during
the day? Will you be open at night?

Lisa Martin of Fairfax County, Virginia, found out about nosy
neighbors the hard way. Martin's creative marketing firm,
LeapFrog Solutions, started out quietly in her four-bedroom
colonial home. Her marketing campaigns and trade show plans went
well until a neighbor, observing the in-and-out parade of her two
employees and occasional visitors, called the "zoning
police." Martin was forced to move the company to commercial
space.

Visit your local zoning office to obtain a copy of the area map,
which shows what your area is zoned for. If you need something
outside the ordinance, you can apply for what's called a
"variance" or "special use" permit. This
isn't a change of zoning but an exception to enforcing limits
on the books. Before a variance is given, there will be a public
hearing before your board of zoning appeal. The board considers the
impact of the change on the rest of the neighborhood; whether
others have gotten this approval in the past; and whether current
regulations pose an undue hardship on doing business in that
area.

As the work force spawns more entrepreneurs and telecommuters,
ordinances prohibiting homebased businesses are slowly changing.
"Quiet" homebased industries-especially information-based
businesses-have the greatest chance of approval. Retail or
manufacturing businesses have a tougher go of it in residential
neighborhoods.

Fortunately, few municipalities have the bodies to go around
checking for zoning violations, but if you are caught violating a
zoning ordinance, enforcement can range from nothing to a fine to
an order to move elsewhere.

One final tip: If you live in a rental apartment, condo,
townhouse or any "high density" housing, check your lease
or deed for restrictions on homebased businesses.

AdditionalResources

e-CityHall.com:
Submit zoning questions, or look up information on inspections,
variances and ordinance enforcement at this "virtual city
hall."

Business Structure

You know the basic choices: sole proprietorship, partnership or
corporation. Your choice will affect your personal liability, the
amount of paperwork you'll have to deal with and the taxes
you'll pay.

Here's a brief overview:

Sole proprietorship.
This is truly Business-R-You: You and your business are one and the
same. Pros: easy to start, less paperwork than other structures, no
separate business tax return, full control, and no pesky partners
or shareholders. Cons: full liability for business goofs. Your
personal assets are at stake should a disgruntled customer or
creditors sue you.

Partnership. Share the
burden and the glory with someone else. Pros: a second brain,
shared risk and a second business nurturer and manager. Cons: more
paperwork, including an annual information return and obtaining a
federal employee ID number; each partner is personally liable for
partnership debts; the possibility of disputes and disagreements;
and the difficulty of finding someone who shares your vision and
style and has complementary skills.

If you do go the partnership route, draft a partnership
agreement spelling out the essentials: the partnership's name,
the place of business, what each partner is putting into the
business, how disputes will be resolved, how profits and losses
will be shared, and how each can buy the other out. This is
crucial.

Also get partnership insurance so one partner can buy the other
out in case of death. When one partner dies, the business must
either liquidate or reorganize, so future planning is key. A
typical buy-sell agreement is funded by life insurance, and you
must state the price the survivor will pay for the other
partner's portion of the business.

Corporation. This is the
most popular choice, especially if you have investors. Pros:
separate legal entity which shields your personal assets in the
event of a lawsuit; ease in bringing in shareholders or
transferring ownership; perpetual existence, which means the
corporation stays in existence until it's dissolved by
directors or by operation of law. Cons: even more paperwork,
including articles of incorporation, bylaws and a separate annual
tax return; and double taxation, meaning the corporation as well as
the salaries and dividends of the officers are taxed.

A standard incorporation is known as a "C"
corporation. Variations on the corporate structure include the
subchapter S corporation and the LLC, or limited liability
corporation. A sub S corporation avoids double taxation by
assigning profits or losses directly to the shareholders, who
report them on their individual tax forms. Limitations of the sub S
structure: There only one class of stock (no "preferred"
vs. "common" stock or "voting" vs.
"nonvoting" distinctions allowed), and you can't have
more than 35 shareholders.

The LLC combines features of a corporation and a partnership. It
shields against personal liability while allowing greater freedom
in dividing profits and losses. Members get a membership interest
(defined in the LLC membership agreement) rather than shares. Rules
for an LLC are contained in state law; some states allow one-person
LLCs, while others require a minimum of two partners.

The form you choose for your business depends on the business
itself-what stage you're in and how many others are actively
involved. Consult with a knowledgeable professional such as an
attorney or accountant, weigh the pros and cons of each form of
business, and then judge for yourself what will work best in your
situation.

Insurance

As a homebased business owner, two types of insurance cry out
for your checkbook: liability and property damage. Liability
protects you against someone getting injured on your premises or by
one of your products. Property damage protects against damage to a
host of things, from computers to carpets.

Let's start with the most inclusive type of insurance and
work our way down:

A business owner's policy (BOP) includes both liability
and property damage coverage. Typical hazards covered include loss
of data, software or income; theft; and general business liability.
The structure housing your business is also covered, so this might
duplicate your homeowners' coverage. A BOP also provides some
off-premises coverage, including liability coverage for products
you sell or parts you install. Things like flood protection or
insurance for outdoor signs may be optional.

A home office policy is a step down from a BOP. This policy
combines homeowners and business insurance, eliminating duplicate
coverage or gaps. This is a good choice for a company with no more
than a handful of business visitors each week and quality computer
equipment. It covers general business liability, lost income and
ongoing expenses like payroll for up to one year if the business
can't operate because of damage to your home. Also covered are
loss of records, accounts receivable, some off-site business
property, fire, theft and personal liability. Many policies
don't cover "options" such as floods or
earthquakes.

A "business pursuits" endorsement to your
homeowner's policy provides the least protection, and isn't
recommended for most homebased businesses that have customers on
site or costly equipment.

Examine your business and your assets to determine your net
worth, likelihood of business interruption, and liability "red
flags." When you've found a policy that's within your
budget and covers possible losses, review it yearly to make sure
it's still adequate.

One final note: If your business has employees, you need
workers' compensation insurance, which covers employees'
injuries on the job. Requirements vary from state to state-check
with your state's employment office to see what's
required.

AdditionalResources

Insure.com:
This is a good general source for any business insurance question
you may have.

Quicken Insurance: You can
find information, get quotes, connect with agents and buy policies
on this site

Questions To Ask A Business Attorney

Few things make a cash-poor entrepreneur quake more than hiring
a lawyer. Here are some questions to ask a prospective attorney
before you hire them:

Do you have time for me? Ideally, your attorney is neither
juggling 312 clients nor playing computer solitaire.

Have you represented small or homebased businesses before?
What did you do for them?

How much is what I want you do likely to cost me? (You
should have prepared a list of what you want your attorney to do.)
Do you charge by the hour, or on a flat-fee basis?

Will you work on retainer? This means you pay the lawyer a
certain sum each month and in return, he or she handles routine
legal matters and is available by phone.

Can you provide me with references?

Finally, listen to your gut feeling as to whether or not you
could work with this person.

Whether you need to hire a lawyer depends on your form of
business; the issues you're facing; your level of knowledge;
and your ability to extract information from free resources (Web
sites, community organizations, trade associations, etc.). If
you're buying a business or a property on which to run a
business, you'll definitely need to consult a lawyer.

But don't just dump your problems on your attorney. As
Washington, D.C., attorney Linda Ravdin says, "The best
clients ask intelligent questions about strategy and help make
decisions." Ravdin contrasts this type of client with
"shopping bag people" who bring in reams of unsorted
information for the attorney. "This type of client," says
Ravdin, "wants you to do everything for them, even things they
could do themselves."